Tuesday, October 6, 2009

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

A few days ago I posted about Brazil's economic rise. I wrote that the awarding of the 2016 Summer Olympics to Rio de Janeiro (as well as the fact that Brazil is hosting the 2014 FIFA World Cup) was further good news for an already strong, developing economy.

The gist is that the Gulf states, China, Russia, Japan and France plan to stop using the U.S. Dollar for oil transactions beginning in 2018. The dollar will be replaced by a basket of currencies that will include the Japanese yen, the Chinese yuan, the euro, gold and a new unified currency that will be introduced for all the Gulf Arab states. Brazil and India have shown interest in participating in such a transition.

This transformation will be a pretty big blow against the value and supremacy of the U.S. Dollar.

I subtitled this post "Good news for gold" because the article also states:

The transitional currency in the move away from dollars, according to Chinese banking sources, may well be gold. An indication of the huge amounts involved can be gained from the wealth of Abu Dhabi, Saudi Arabia, Kuwait and Qatar who together hold an estimated $2.1 trillion in dollar reserves.

That means significantly greater demand for gold may be on the horizon. If these "Chinese banking sources" are right. How far on the horizon is an entirely different question. Keep in mind that this transformation isn't likely to take full effect before 2018. If this article is trying to imply that these participating states will buy their gold with dollars, that will only serve to weaken the dollar further and push up the value of gold even more.

I also subtitled this post 'Ron Paul was right.' First of all, Ron Paul is a huge gold bull so there's that. More importantly, Ron Paul has publicly spoken about the oil-dollar relationship for a long time and he warned us that something like this was unavoidable quite a while ago.

Realizing the world was embarking on something new and mind-boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.

This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo–gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.

During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both “guns and butter.”

Harrison tries to explain the historical roots of our current economic crisis. Harrison challenges conventional thinking and argues that the U.S.'s economic policy of the 1950s-1970s was not really Keynesian, just as our economic policy during the 1980s-2000s was not really free-market. Instead, he tries to take an apolitical perspective and he argues that excessive debt is the root source of the current crisis. The economy's structural problems were masked by "the financialization of the American and British economies." By this he is referring to the growth of the financial sector and the reliance on a series of economic bubbles, inflation and (artificial) asset price appreciation for economic growth. The housing crisis and resulting financial crisis finally forced the economy's structural problems to the fore.

There is nothing terribly new here. Other writers have hit on these points before but Mr. Harrison brings it all together in a very eloquent and well-sourced narrative.

Here is Harrison's summary of the historical events that led to our current situation, in his own words:

1. A depression was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.

2. The effects of this depression have been lessened by economic stimulus and government support.

3. Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more stock market increases and eventually to asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.

4. In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized.

5.Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.

What does Harrison think of the U.S. government's response to the crisis? He states that all of its efforts essentially boil down to a desperate attempt at increasing asset prices, or at least preventing them from declining further. This is true of the TALF program, the TARP program, the proposed elimination of marking-to-market accounting, near zero interest rates and the Capital Assistance Program. The government is basically trying (and somewhat succeeding at) "reflating" the economy.

In the longer term, Harrison believes that there are only two things that can prevent the American economy from experiencing a significant contraction: (1) prolonged, large-scale government deficit spending to replace contracting private consumption, or (2) transforming the American economy so that it can run a trade surplus. Option #2 is basically impossible to achieve, he argues. Option #1 is politically impossible in the long-term. When that government spending thats propping up the economy ends, expect a serious economic contraction more severe than the first (which will finally convince policy makers and the public that we're in a depression).

Edward Harrison's analysis is without a doubt one of the best I've read in a long time. I seriously encourage you all to go read it in full. However, I have a few questions/comments I would make to Harrison.

1. Harrison doesn't address the possibility that excessive government spending could weaken the U.S. Dollar to the point where its status as the world's reserve currency could be seriously challenged. What does he make of China, Russia and other emerging economies talking about replacing the Dollar for reserve currency purposes? What does he make of Tiger Management's Julian Robertson warning about the Dollar's future? What does he make of the World Bank's president's recent comments? On his biography page it states that Edward Harrison was a diplomat earlier in his career, therefore his insight would be particularly valuable. Is this all just political posturing or is it a serious challenge?

2. I want to focus on one point Harrison makes: he comments on the "financialization" of the American economy. This is a reference to the fact that economic growth in the U.S. (and U.K.) has been very reliant on the manipulations of (and growth of) the financial sector. I think this point deserves deeper examination. As I see it, not only is this not a normal recession, its not a "normal" depression in the sense that our economy is radically different from the way it was in the 1930s. Lets say government spending propped up the economy for an extended period during which much of the private sector's debt could be unwound and paid off, where would growth come from after that period ended? What sector(s) of the economy would be able to sustain the American standard of living after that period ends? Does he expect sectors like construction and retail to come back in full force? Judging from his economic analysis of the years 2000-2006, I doubt it. Does he expect much of the financial sector to be repurposed? And if so, to what ends? Even if most private sector debt is unwound during a prolonged decade-long period of Keynesian support of the economy and slow but steady economic growth returns after that, isn't it true that we would still need a return to trade surplus conditions in order to pay off our public debt which would, by then, probably be massive?

3. Harrison remarks that the U.S. is following the deflationary, secular bear-market model that Japan experienced during the "lost decade(s)." He should explain to laymen such as myself why, after two decades of economic stimulus and propping up the economy through deficit spending and efforts at preventing asset price declines, Japan was still unable to prevent long-term economic contraction and bear-market conditions. What did it do wrong and what is the U.S. doing right or differently which would allow us to succeed? Remember, Japan is still experiencing historic year-over-year deflationary declines as of last month.

4. Harrison comments that we can expect "an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government" over the next decade as a result of the coming economic volatility/instability. An extremely important point, I think. Nice euphemism by the way ... "more muscular." What are Mr. Harrison's thoughts on cutting military spending and government spending in order to lessen the possibility that desperate and bankrupt governments will turn to war and authoritarianism as a solution to their problems? I'm leaning towards it being a good idea, at least if we can convince the rest of the world (by which I mean, the other big military spending countries besides the U.S.) to go along with it as well. Unfortunately I don't see any politicians from the two major parties who have the political will or foresight to press for something like that on the global stage. I'd be particularly interested in Mr. Harrison's thoughts on this matter since he is a former diplomat.

I really, REALLY encourage you to go read the article. Most of the rest of the financial media is still standing amazed at the fact that Wall Street firms are still up to their usual "tricks" (massive derivatives trading, over-leveraged banks, "flash trading," etc). Duh. Did anyone really expect that to change? I expect more from my readers. This article is far more forward-thinking, paints a far broader picture and is much better sourced than most of the junk that the mainstream media is printing.

Saturday, October 3, 2009

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

The big news yesterday was that the 2016 Summer Olympics were awarded to the city of Rio de Janeiro. I say good for Rio, congratulations!

A lot of the media coverage around this story in the U.S. focused on President Obama's trip to Copenhagen to lobby the International Olympic Committee on behalf of the city of Chicago's Olympic bid. Clearly those efforts failed.

However, I was more interested in another angle: how this announcement relates to the Brazilian economy.

The 2014 FIFA World Cup is also being held in Brazil. The FIFA World Cup actually garners more television viewers around the globe than the Summer Olympics does. Unlike the Summer Olympics, which will take place almost entirely within Rio de Janeiro, the World Cup will be staged in twelve host cities across the country.

So two of the biggest atheletic competitions in the world (possible, the two biggest atheletic competitions in the world) will both be held in Brazil within 2 years of each other. This is great news for the Brazilian economy. Construction will create jobs. Brazil will likely see a multitude of tourists and foreign media visit its country and spend. Brazil will be forced to expand and build up its infrastructure. The economic "multiplier effect" of this infracture spending will likely be considerably greater than it would have been in Chicago, Tokyo or Madrid where infrastructure is already considerably built out and already of a relatively high quality.

The government of Brazil is planning on investing $11 billion into the economy as host. Some analysts have commented that Brazilian commodity producers stand to gain from the massive infrastructure construction. [1]

Reuters India is reporting that a Brazilian government-commissioned study is estimating that the Olympics alone will give the Brazilian-economy a $24.5 billion boost. Furthermore, a U.C. Berkeley study has found that countries that host the Olympics generally have a subsequent growth in exports. [2]

The news goes beyond athletics and international spectacles however.

Just yesterday, the Los Angeles Times reported that Brazil "is leading Latin American nations out of recession." It will have flat to slight growth this year and is projected to grow at a rate of 3.5% in 2010. Compared to another large, industrial Latin American country, Mexico, the differences are stark. The IMF is projecting that Mexico will contract an alarming 7% this year before growing 3% next year. [3]

Of course, these projections are based on the premise that Latin America is indeed going to enter a recovery phase next year. Thats not a given, although it seems more likely than the possibility that the United States will enter recovery next year, in my opinion. Regardless, its clear that Brazil seems to be out-competing many other Latin American countries and is emerging as a strong and dynamic economy in the region.

The Wall Street Journal is painting an even rosier picture. Its reporting economic growth of 1% in 2009, with projected growth of 4.5% to 5% for 2010. However, economists also warn about the dangers of inflation and higher interest rates (despite interest rates being at a historic low at the moment). [4]

I don't mean to sound like a rah-rah cheerleader for Brazil (really!). Brazil still faces major obstacles. The image most Americans have of Brazil is of violent slums, as depicted in the movie 'City of God.' Violent crime is a major issue facing the country. Much of the country lives in poverty and, of those, many are down-right destitute. As is the case in most Third World countries, political and civic corruption is endemic. It has a history of political instability. The list of problems that Brazil faces could go on and on.

However, I think theres some substance to all of the positive reports coming out about Brazil. Normally, when Americans think of large, industrial, developing economies we think of China. However, the Chinese economy is deeply intertwined with the troubled American economy and faces significant structural problems of its own. If you look at my post from yesterday on a possible stock market crash, you'll see that some analysts believe that there is a Chinese commodities bubble. Brazil has many of the positive aspects of an economy like the Chinese one but seems to be a bit less exposed to the type of risks that China faces. Thats my (uneducated) opinion at least, so take it as you will. At the very least, its an economy to keep your eye on.

Of course, who can forget Brazil's two most important assets (nay, national treasures): beautiful Brazilian women and beautiful Brazilian beaches. :)

The question I posed was: Do you support healthcare reform in the U.S.?

The results were:

1. Yes, I support instituting a universal healthcare system: 3 votes (3%)2. Yes, with a public option: 8 votes (8%)3. Yes, but without a public option: 5 votes (5%)4. No, not at all. It would cost too much: 3 votes (3%)5. No, not at all. The government is too inefficient: 15 votes (16%)6. No, not at all. I don't trust President Obama: 14 votes (15%)7. No, not at all. I don't trust government, period: 43 votes (47%)8. Undecided: 0 votes (o%)9. Other: 0 votes (0%)

91 people voted in total.

According to my own calculations, that means 16 votes (17.6%) were in favor of healthcare reform in some form and 75 votes (82.4%) were against it.

I was surprised to see that not that many people were against healthcare reform because of financial or cost-related issues. Most were against it because they didn't trust the government and/or President Obama or because they thought the government would be too inefficient in administering healthcare.

What are his ten reasons? Well, I encourage you to go over to SeekingAlpha and read the article for yourself but I'll give you a taste here. In my own words, his ten reasons are:

1. Rampant insider selling.

2. Much of the current rally has been (a.) based on trading in bankrupt companies (Fannie Mae, Freddie Mac, Lehman Brothers, etc) (b.) made up of investors trying to cover their shorts and (c.) of a low volume.

3. Most investors are short-term bullish and long-term bearish. Furthermore, market psychology does not currently correlate with the economic fundamentals.

4. A lot of the market is short on the U.S. Dollar and long on ... "everything else."

5. Household incomes are going down while the number of people living in poverty is growing. "Income dispersion" is growing.

6. There is a Chinese commodities bubble. The rise in commodities prices isn't because the Chinese economy is really growing as fast as it appears to be, its the result of the Chinese investing in commodities so as to avoid the U.S. Dollar. The Chinese business model is just as flawed as the American one.

7. Under President Obama we have more government intervention into the economy, there is increased protectionist sentiment and there are "socialist tones" to our political rhetoric.

8. The money supply and credit continue to contract at alarming rates.

9. The market is very complacent and everyone is (falsely) assuming that everything is okay.

10. The European economy is still in shambles despite proclamations from European political leaders that "the recession is over" there. To quote Baggio:"What happened to Latvia’s currency crisis or the Swedish Banks? Are Hungary and Poland ok? Has the Austrian Banks’ exposure to Eastern Europe disappeared? Is Spain back on its feet? Is the UK solvent again? Are Irish banks lending like there is no tomorrow? How about Germany’s manufacturing base—is it solid with a EUR at 1.48 and the US consumer missing-in-action? Is Deutsche Bank’s $3 trillion balance sheet made up of only physical Gold? Are German banks profitable and healthy again? I guess somebody waved a magic wand and fixed all Europe’s problems overnight!"

This is just a very basic summary of Mr. Baggio's article. This summary doesn't do it justice so I encourage you to go over to the actual article and read it in-depthly.

So there you have it. Are you convinced? What are your thoughts on the future of the stock market?

Monday, September 28, 2009

The President of the World Bank, Robert Zoellick, is asserting that “The United States would be mistaken to take for granted the dollar’s place as the world’s predominant reserve currency." This is according to excerpts of a speech which Zoellick is slated to deliver today to the Paul H. Nitze School of Advanced International Studies at Johns Hopkins University. Zoellick also called for greater international cooperation on economic issues, particularly through a "peer-review" process. Zoellick also criticized central banks and their response to the economic crisis. Zoellick argued that central banks "“argued that damage to the real economy of jobs production, savings and consumption could be contained, once bubbles burst, through aggressive raising of interest rates. They turned out to be wrong.”[1]

Robert Zoellick served as U.S. Trade Represenative and Deputy Secretary of State under the George W. Bush administration. President Bush appointed him to succeed Paul Wolfowitz as President of the World Bank on July 1st, 2007. [2]

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions

Marc Faber is back in the news. Who is Marc Faber? He's the author of the 'Gloom, Boom, Doom Report.' On March 9th, 2009, the S&P 500 hit a 12-year low. On that day, Faber predicted stocks would rally thanks to government stimulus money being pumped into the economy. Since then, the S&P 500 has rallied 55%.

Faber is back in the news today, making the following assertions:

*Stocks have likely peaked for the year and will probably face a 20% correction.*Faber prefers emerging markets. The Asian economies will continue to grow despite the financial mess in the West.*Fiscal and monetary stimulus measures have only delayed an inevitable crisis instead of preventing it.*“The next stage is for total breakdown of the financial system and for an economic and financial crisis that will bankrupt governments.” -Faber*Gold will face a correction along with equities. Faber "wouldn't be surprised" to see gold settle at $920 an ounce. However, Faber does not plan on selling his holdings in gold.*Despite being an ultimately doomed currency, the U.S. Dollar is likely to rally amid deflation concerns.

Saturday, September 26, 2009

If you've been watching the news you know that tensions between Iran and the U.S. are very high. We should consider the possible economic repercussions ...

The first thought that comes to mind is, of course, about oil. Oil prices did rise in New York on Friday as news about Iran's nuclear program went public. However, one analyst noted that while in previous economic periods this type of news could have resulted in a $10 run-up in the price of oil, the recession has significantly weakened the global demand for oil and the oil industry has quite a bit of spare capacity so the effect wasn't that severe. [1] Iran produces less than 3% of the oil consumed daily in the world, so spare capacity could pick up any slack should Iran's oil industry stop exporting for whatever reason. [2]

However, Iran lies on the Strait of Hormuz, through which 20% of global oil exports pass. Remember, the Arabian peninsula (Saudi Arabia, Oman, Yemen) are right across the Persian Gulf from Iran. The real threat to the global economy is if these current tensions transform into a military conflict. At that point, its hard to predict what would happen to the price of oil (other than that it would go up, obviously).

Interestingly, a few days ago the New York Times published an article which stated that China has joined India and a few other countries in selling gasoline to Iran (despite being a net oil exporter, Iran lacks the refining capacity to meet its domestic demand for gasoline). The state-run Chinese firm that is selling oil to Iran also happens to be doing its trade in Euros, answering Tehran's call to move away from use of the U.S. Dollar. These imports would soften the blow that any potential U.S. trade sanctions would exert on the Iranian economy. Ironically, Western sanctions on Iran could turn into a business opportunity for Chinese and Indian companies. [3]

Elsewhere on the globe, the Wall Street Journal warns that Nigeria could pose a bigger energy-related problem for the global economy than Iran does. Nigeria used to produce 13% of the world's sweet crude oil in 2005. However, political instability has reduced output since then. [2]

Friday, September 25, 2009

*The founder and Chairman of Tiger Management, Julian Robertson, warned that the U.S. faces a financial "armageddon" if China and Japan stop buying U.S. debt or start selling off the bonds they already own. He advised that the U.S. should "quit spending, start saving, and scale backward."

I think hes probably right but how politically feasible is that? What politician would be willing to publicly promote austerity measures in the U.S. and could still manage to win elected office? Ron Paul maybe? Unfortunately that still seems like a long shot if we're talking about the Presidency.Read more: US May Face 'Armageddon' If China, Japan Don't Buy Debt

*Citigroup is thinking about closing some of its branches across the country. Apparently Citibank has previously announced plans to close its consumer finance division (news to me). Citigroup's plans for revitalizing itself include figuring out how to collect more deposits and improving customer service. Ingenious, I'm sure it only took an army of consultants a lot of time and money to come to that radical conclusion.Read more: Citigroup Said to Consider Shrinking Branch Network (Update 1)

*A research firm in Spain is predicting that the Spanish economy will continue to conract for the next three years. They state that the economy is likely to eventually lose 11% of GDP compared to its peak in this decade. Unemployment will peak at 25%. In other words, it is entering a full-fledged Depression. One analyst claims it will take a 10% reduction in salaries to make the Spanish economy better able to compete globally, but the trade unions and current government will fight to prevent any declines. Despite all this, the government continues to claim that the recession will be milder in Spain than in the rest of Europe.

Ambrose Evans-Pritchard blames Spain's membership in the European Monetary Union for having a big role in creating the crisis. Membership in the EMU automatically cut interest rates in half. If this recession/crisis continues, or gets more severe, I expect more cracks to appear in the European Union.Read more: Spain tips into depression

Thursday, September 24, 2009

This blog is normally about economics, although I've written about politics a few times. The following story really caught my attention and I felt compelled to blog about it.

The L.A. Times is reporting that the Supreme Court will hear a case this fall to decide whether or not videos of animal torture are protected by the 1st Amendment. At issue are various types of videos marketed to people with certain sexual fetishes. These videos are meant to sexually stimulate the viewer by showing small animals, kittens and such, being crushed and burned to death. Also at issue are dogfighting-related videos that show animals being trapped and left defenseless only to be killed and torn apart by pit bulls. [1]

Liberals are launching an all-out campaign to overturn federal legislation that makes these types of videos illegal. The American Civil Liberties Union (ACLU) is leading the charge. A coalition representing major media interests, including movie producers and journalists, is providing a ton of legal aid to the producers of these films under the guise of supposedly defending free speech. However, even the extremely liberal L.A. Times points out that their argument is complete baloney. The existing federal law explicitly states that depictions of hunting, fishing and other sportsmen-related activities are not illegal, nor are images that have "religious, political, scientific, journalistic, historical or artistic value" such as, say, a video of a medical/veterinary animal dissection or a documentary on food production. The law is specifically and only aimed at sadistic depictions of animal cruelty, torture or death. The things depicted in these videos would already land their producers in prison in all 50 states under existing animal cruelty laws, were they to be caught in the act of perpetrating them. Yet, Hollywood and corporate media interests are trying to convince the public that somehow your right to free speech will be infringed if these videos are banned.

Where were these liberal champions of free speech when individuals were being arrested for putting up images that depicted President Obama as The Joker? [2] Where were Hollywood's expensive lawyers when corporate interests had a billboard that criticized an insurance company censored and removed in Los Angeles? [3] Nowhere, that's where. So stop and think about that for a second before you take these jokers (heh) at face value. Why is it that they don't seem to give a damn about defending political speech, especially if that political speech criticizes their candidate of choice or challenges powerful financial interests, but they become raging libertarians when it comes to defending the "right" of some degenerate to painfully kill an innocent animal so that they can masturbate? I ask that question in all seriousness because I don't have definitive answers. All I know is that when I look around at contemporary America I see a culture that glamorizes death, promotes moral relativism (often through coercion and almost always undemocratically) and denigrates anyone who dares to believe in the dignity of living things or who dares to live by a moral code.

After all, how many of the people supporting the production of these videos are the same people who criticize anyone who hunts or fishes? When was the last time you saw Hollywood paying for lawyers to defend the 2nd Amendment? When was the last time the ACLU launched a campaign to defend the rights of hunters and fishermen? Apparently, humanely and legally hunting game to feed your family is barbaric but crushing a kitten to death under a woman's high heel (psychoanalyze that fetish, eh? ... better yet, don't) so that you can masturbate is just fine and dandy.

How are we not living in a culture of death?

This brings to mind another low point in Hollywood's history: the execution of Stanley "Tookie" Williams. In case you don't know, "Tookie" Williams was the founder of the Crips street gang who was convicted of four murders. Not only did he admit to shooting an innocent man at point-blank range and finding the man's dying gasps "hilarious," not only did he admit to targeting white and Asian victims solely because of their race, but he is also indirectly responsible (through the creation of the Crips gang) for destroying the lives of an untold number of people and transforming entire neighborhoods of Los Angeles into war zones. Yet, a wide variety of individuals in Hollywood stood by Williams and criticized the state of California for executing him. Liberals gathered in droves outside of San Quentin Prison on the night of his execution to publicly mourn the death of one of the most vile, destructive human beings to walk the earth in recent memory. These are the same people who think that anyone who has any qualms whatsoever over abortion must be a theocratic, far-right fundamentalist Christian that only wants to control women's bodies. No contradiction there, right?

What kind of society not only accepts but commercializes the suffering, misery and death of the weak, defenseless and innocent while simultaneously valorizing and praising violent psychopaths that kill other living things for their own amusement?

Is this the kind of society you want your kids to grow up in? No doubt years from now when kids are perpetrating more acts of violence, when more kids are medicated daily so that they can "deal" with reality, when more kids are psychologically damaged, liberals will blame it on ... not spending enough money on schools. Yep, we need to spend more. The possibility that it could have something to do with growing up in a culture that expresses itself through sadism and cruelty? Nah. You must be one of those old-fashioned moral absolutists. Quit making value judgments.

Am I the only who thinks our society is messed up? Not just messed up but deeply messed up? Who's promoting this culture of death and why?

Friday, September 18, 2009

Note: I am not an investment advisor and nothing I state should be taken as investment advice. Please consult your own private professional financial advisor for help in making investment decisions.

The whole world is talking about gold breaking $1,000 in price.

Many people are asking: is this price sustainable? Where will gold go from here?

I can't really answer these questions myself as I'm not an expert on gold or on precious metals in general. I will note that gold is not really an asset in the normal sense, it is quite simply a form of money. So the question of whether or not gold will go higher can also be framed as "Will the U.S. Dollar (or whatever the currency may be where you live) go lower/weaken?" If so, then the answer is likely yes, the price of gold will go higher vis-a-vis that currency.

We all know the U.S. Dollar (USD) is in the dumps. The Federal Reserve's "quantitative easing" policy and climbing federal deficits are working a one-two combo on the USD. This makes me think that the gold rally isn't unwarranted and that a "gold bubble" probably isn't in effect right now, contrary to what some pundits have postulated.

A lot of news about gold has been coming out of Asia as of late.

To begin with, an Internet publication related to the mining industry and precious metals (Mineweb) is reporting that China's state-run Central Television network has aired a news program extolling the benefits of investing in precious metals and seemingly advocating that the Chinese public engage in precious metals investing by promoting the Chinese mint's bullion products. [1] A recent Wall Street Journal article seems to confirm this news report. [2] Several websites are repeating rumors first published by an employee of SinoLatin Capital, a merchant bank which specializes in transactions between Chinese and Latin American firms, that China may attempt to ban the export of gold. [3] These are just rumors and the author mentions that his firm has several Chinese mining companies as clients, so make of that what you will. All of this comes on top of the admission earlier this year that the Chinese Central Bank has been purchasing gold in order to build up its reserves.

If you want to get an idea of what the "gold mania" in China is like at the layman's level, I suggest you read this article. [4] Apparently you can buy gold at most retail bank branches in China and the Chinese mint is opening shops from which to sell bullion in many cities.

Elsewhere in Asia, it was announced today that Pakistan is abolishing import duties on gold in order to encourage legal imports of gold and discourage black market imports. [5]

Now for the "but." In the past I've mentioned the possibility of a debt-fueled deflationary depression in the U.S. (see Debt Deflation and False Dawns) I thus have to bring to your attention this article which states that in a deflationary decline gold would not be a good hedge. [6] The article's authors make a convincing argument, especially if you're a fan of the gold standard and a critic of fiat currencies.

Regardless of what happens in the future, my judgment right now is as follows. We have to remember that the price of gold is notoriously volatile. The fact that gold is so strong right now and so many people are talking about investing in it reveals how little confidence there is in the current financial order and how much unease and uncertainty continues to exist out there. That's the only conclusion I can positively take away from this situation at the moment.

According to Chrysler (now owned by Italian automaker Fiat), sales of its cars are down 19% so far this month.

Chrysler/Fiat's CEO described this development as a "disaster" and said the auto industry would see "harsh reality" this month.

The good news? Apparently Chrysler lots cumulatively have about 1/4 of the inventory on hand compared to a year ago. Chrysler has plans to restock those lots, which presumably means more work for their factories which is good for their employees.

Nonetheless, this development supports the argument many people made: that "Cash for Clunkers" wouldn't create any new demand, it would only cause people who already had plans to buy cars to buy during the program's run thus reducing demand in the months afterward.

Monday, September 14, 2009

This isn't economy-related but its pretty big news and I'm surprised more people aren't talking or writing about it.

Did anyone else catch this past weekend's The Chris Matthews Show (the Sunday morning political round-table on NBC affiliates, not MSNBC's Hardball)?

A few weeks ago, around September 2nd/3rd, there was a lot of speculation in the media about whether or not U.S. Supreme Court Justice John Paul Stevens was getting ready to retire soon. At that time, it was announced that Stevens had only hired one law clerk for 2010, instead of the usual four, which many interpreted as a sign that 2010 would be his last year on the court.

On The Chris Matthews Show, panelist Howard Fineman (Newsweek's Senior Editor and Chief Political Correspondent) made it clear that the rumors are true: Stevens is almost definitely going to retire in the spring of 2010. Here's the excerpt from the show transcript:

Mr. FINEMAN: There's been talk that Justice John Paul Stevens may retire. I'm told by former clerks of his that it's definite, that by next spring he'll announce that he's leaving, which means that Barack Obama will have more research to do about somebody else to appoint. [1]

Fineman published an article today on Newsweek's website that further verifies this. He writes:

Though there are no sure things in life or judging, Stevens's legion of former clerks are convinced that he will in fact retire late next spring. Stevens is known as particularly punctual and exacting about lining up new clerks early in the year. The fact that he did not do so is a certain indication that he will step down, one of his former clerks told me this week. "There is NO WAY he would go into next year without the full group," said this clerk, who spoke on background out of respect for court tradition and the behind-the-scenes role of clerks. Another former clerk, speaking on the same condition, agreed."He's still vigorous and I think he wants to leave the court that way," this clerk told me. [2]

So there you have it. It looks like Justice John Paul Stevens will announce his retirement next spring and President Obama will get to appoint another Supreme Court Justice.

Stevens is without a doubt a member of the 'liberal wing' of the Supreme Court so President Obama's appointment is unlikely to fundamentally alter the ideological makeup of the court.

However, if Stevens does announce his retirement in the spring it will be at the beginning of the 2010 midterm election cycle. That means his retirement will almost surely have significant political importance and we could see quite a heated political battle. If President Obama's popularity keeps slumping or if Obama loses out completely in the healthcare debate then conservatives will certainly feel emboldened and will politically press for, at least, a Justice who is more conservative than Stevens was. If someone like Justice Anthony Kennedy (who is currently the sole swingvote between the liberal and conservative wings) gets nominated then that will almost surely be seen as a conservative victory. Liberals will fight hard to hold their ground on the court and President Obama will have to make sure and appease them to some degree lest his support among his base constituency further erode.

So who's being seriously considered by the White House? I certainly don't know so I defer to the opinion of Mr. Fineman, a D.C. insider who clearly has connections in the Court. Fineman (among many others in the media, actually) mentions Harold Koh, a Legal Advisor to the State Department and dean at Yale Law School, in his article. He served in various forms under the Clinton and Reagan administrations and was a clerk for former Justice Harry Blackmun (who was appointed by President Nixon and started out as a conservative but latered authored the Roe v. Wade decision). David Bernstein, a conservative law professor at George Mason University, wrote that Koh is a "highly partisan Democrat" but the Yale Conservative Law Students group responded by writing that "Dean Koh has been very supportive of conservative students and conservative student organizations." [3] Koh, who is of Korean ancestry, would be the first Asian-American to serve on the Court.

Mr. Koh is just one possible candidate, albeit a strong one considering the media buzz surrounding him.

... among many, many other possible candidates ... there is no real way to predict this, this early. Regardless, it looks like 2010 be a big year politically (and economically! as readers of my blog know).

Sunday, September 13, 2009

Ambrose Evans-Pritchard, International Business Editor for the Telegraph, wrote an article on the Japanese fiscal situation at the beginning of this month.

The article informs us that, fiscally, Japan is in very dire straights. The article states that:1. The IMF is expecting the Japanese budget deficit to top 10% of GDP this year (for some perspective, the U.S.'s deficit-to-GDP level will likely end up being around 12% this year).2. Japan's Gross Public Debt will reach 215% of GDP in 2009, the highest in the world.3. Corporate tax revenues are negative in Japan due to "a collapse in profits."4. The Japanese savings rate has fallen from 14% in 1990 to 2% today.

Wow. My perspective? Its important to keep in mind that Japan has reached this point after nearly 2 decades of on-and-off (mostly on) deflationary decline, numerous corporate bailouts and several rounds of attempted fiscal stimulus. Even with all that effort expended, Japan is still experiencing record year-over-year deflation and it has accumulated alarming levels of debt (which, in turn, is alarming bond investors). The Japanese deflationary period is not exactly analogous to the U.S.'s current situation but, in some ways, its a better fit than the Great Depression of the 1930s is. If the stimulus ends up being incapable of resuscitating the economy people should definitely pause, take a look at the Japanese historical experience of the past 2 decades and ask ourselves what exactly happened there and how can we avoid the same fate? That's especially true if policy-makers begin pushing for a second major stimulus package or a string of more "Cash for Clunkers"-type subsidies.

So why'd I label in this post "The Japanese Obama"? Well, as we can see, while in some ways Japan is trending years ahead of us in regard to being in a debt-fueled slump, in other ways they're just catching up.

The Japanese just elected the Democratic Party of Japan (unseating the Liberal Democratic Party for only the second time in the post-war period). The DPJ brings with it Mr. Yukio Hatoyama as the new Prime Minister. Hatoyama and his party were partly elected on the promise of Obama-style social reform including, as Evans-Pritchard's article points out, $180 billion "for child allowances and social policy." The people of Japan have invested a lot of hope in the idea that the new blood of the DPJ will re-invigorate Japan. I think the changes to the savings rate tell us everything. Japanese culture emphasizes saving and frugality. Thats why the savings rate was at 14% in 1990. It didn't come down because the Japanese suddenly became rabid consumers. My supposition is that it came down primarily because people had to utilize their savings to "make ends meet" quite often. According to Evans-Pritchard, PM Hatoyama is already backing away from some of his social policy promises after realizing the costs involved.

A lot of attention is being focused on China. This is justified of course since China is the rising star on the global stage. However, we should still pay attention to the second biggest economy in the world. Considering our similar predicaments, we potentially have a lot to learn from their experience(s).

Thursday, September 10, 2009

What lies in store for the American economy? Inflation or deflation? The financial world has been debating this question for a while now.

Famous investor Marc Faber spoke publicly on Wednesday (9/9/09) and reiterated his opinion that the U.S.'s extremely high deficit, near-zero interest rates and the Federal Reserve's quantitative easing policy will combine to spur inflation in the future.

Faber predicted the current stock market rally last October, when he advised his readers to invest in stocks again. Apparently Faber is still quite bullish on stocks but not because he has much faith in a recovery or in the current state of the economy. Quite the opposite, actually.

“Money printing will be unprecedented because the deficit will need to be financed,” Faber said. “The weaker the economy, the more the stock market will go up because the money that is being printed will go into” speculative assets.

Wednesday, September 9, 2009

For the second poll on this blog, I posed the following question to you readers: "Which is the the bigger threat to the global economy?" The options were (1) deflation and (2) inflation.

148 people voted.

The results were as follows ...

Deflation: 56 votes (37%)Inflation: 92 (62%)

Its clear that a majority of my readers believe that inflation is currently the biggest threat to the global economy. Yet, a sizable number of readers (nearly 40%) thought deflation was the biggest threat. I'm glad to see that kind of diversity of opinion among my readers. My take? I'm still undecided. I know that sounds like a "cop-out" but its the truth, I see both inflationary pressure and deflationary pressure working on the economy right now. That's one of the reasons why I'm committed to continue covering this topic in the future.

If you voted in this poll (or even if you didn't) feel free to use the comments section attached to this thread to defend your opinion or your take on this question.

----

For my next poll question I've decided to ask about the plan for nationalized healthcare in the U.S. Please vote!

In the article, Lopez points out the divergent fates of two billboards in Los Angeles.

The first billboard is a stark yellow ad with simple black text that reads "Consumer Watchdog says: 'You Can't Trust Mercury Insurance.'" The text is followed by a referral to Consumer Watchdog's website. Their website features ten objectively factual reasons explaining why Consumer Watchdog believes consumers should be wary of doing business with L.A.-based Mercury Insurance Company. The billboard was located on Wilshire Boulevard in L.A.'s Koreatown.

A few blocks down Wilshire, also in Koreatown, stands another billboard, this one advertising Absolut Mango vodka. This billboard depicts a mango fruit surrounded on two sides by a series of wavy lines. That description might sound innocuous in text but if you look at an image of the billboard (you can see an image by clicking here) you'll see that the artists clearly intended to suggest the shape of a woman's vagina. The image, which is not on a traditional billboard but rather is draped across the side of a building, is described by Lopez as "a 10-story vagina on a building."

So what happened to these billboards? Mercury Insurance Company complained to CBS Outdoor about the Consumer Watchdog one. Even though Consumer Watchdog's billboard (and Consumer Watchdog's website) contains only factual information and the billboard was determined not to be in violation of any laws or of CBS Outdoor's policies when it was first put up, CBS Outdoor caved to Mercury's pressure and pre-emptively pulled it down.

What happened to the Absolut vagina ad? Well ... nothing, really. Its still up there as of today. Apparently Absolut has other, very similar, ad campaigns for it's pear-flavored vodka (image here), citron-flavored vodka (click here), as well as their mandarin-orange and peach flavors (I don't have images for those). Of course, as far as Absolut is concerned, these ads are meant to depict "streams" and not the female anatomy. Apparently, anyone out there who dares to think that a large corporation, especially a corporation that sells alcohol, would dare to use sex to market its products (especially in a veiled, suggestive way) must be deeply cynical and simply projecting their own dirty-mind onto Absolut's noble efforts to promote artistic endeavor. Whats your take on this?

So ... what's the lesson here? Well, if you dare to speak up and criticize the practices of a major corporation in a lawful and objective manner, you can expect big business to leverage its financial and political clout (Mercury Insurance is one of the biggest political contributors in the state of California) in order to silence you and your message, or at least prevent you from airing it in a public environment. What if you drape the image of a 10-story tall vagina on the side of a building in a major metropolitan area? You can expect to sell more products, get rich and face very little public scrutiny. In Los Angeles, economic truth is not welcome in public places but pornography is.

As Harvey Rosenfield, founder of Consumer Watchdog, puts it: "Truth is more controversial than pornography."

Monday, September 7, 2009

Yesterday I posted about Wall Street's proposal to securitize "life settlements." If you haven't read that post yet, you can find it by clicking here. The post got a huge response. In fact, the initial New York Times article got media attention from around the world. Its pretty clear that this is an issue that resonates strongly with the public. People are angry. Righteously so, in my opinion.

Since this is an issue many of you clearly care about, I thought I would dig deeper and bring you readers some more information.

Some readers pointed out that the concept of "life settlements" isn't new. That's true. They've actually been around since the early part of the 20th century. For most of their history they were known as "viatical settlements."[1] Historically, these kind of settlements were mostly engaged in by "high networth" (read: rich) elderly individuals who were fairly certain they only had a few years of life left (for more on how viatical settlements transformed into the modern form of life settlements, keep reading below). However, we shouldn't dismiss the story just because the concept isn't new. There are a few factors that make this story worthy of people's attention:

(a) Some banks are clearly planning on transforming this into a big business. The New York Times quotes an estimate that states that the market for this type of financial product could grow to $500 billion [2]. The Economist estimates that the market currently stands at about $18-19 billion.[3]

(b)The proposal is to securitize these life settlements into CDO-like securities. Thats the same business model that was used to transform subprime mortages into securities. That ended horribly. Why is Wall Street so insistent on following a business model that has failed so dramatically in the recent past?

(c)Lets look at who is behind this proposal. The New York Times article points to a Jan Buckler at a firm called DBRS as one of the pioneers in life settlement risk management.[2] If we look at Jan Buckler's LinkedIn.com page, [4] we see that she worked for Bear Stearns from 1999 to 2007. The article also points to an individual named Andrew Terrell, who was in charge of Bear Stearn's longetivity and mortality desk, as a major proponent of the idea. Most readers will know that Bear Stearn's was one of the first bank casualties of the recession. These are only two individuals, a tiny fraction of the total number involved in this "industry." However, this illustrates a point: do you trust people who worked for failed banks (that were driven into the ground because of their greed) to employ a business model that has failed dramatically over the past few years to package and trade securities which make it in the investor's interest for an innocent human being to die as fast as possible? Thats a serious question because a lot of the financial media is reporting that this whole proposal is no big deal and they don't understand what the fuss is about.

(d) This idea is being proposed in the middle of a brutal recession that is leaving lots of people out of work and desperate. Wall Street says financial agreements like this help those people make ends meet. Others would say this is just a new way for Wall Street to make a buck off people in one of their weakest and most vulnerable moments.

(e) This idea is being proposed at a time when many seniors are already worried about the proposals for nationalized health care and are suspicious about the possible existence of so-called "death panels" that might refuse healthcare in one form or another to the elderly or very sick. Here, we're talking about a proposal that explicitly puts it in the interest of banks and investors for the elderly and very sick to die as fast as possible. I'm not one for conspiracy theories but even I can't avoid mentioning the fact that Goldman Sachs (which is one of the banks lining up behind this proposal) has a lot of ties to the current administration. Make of that what you will.

Okay, a lot of that was reiterating some of what I said yesterday. I apologize for that but I thought it was necessary to point out why this story isn't just ho-hum or driven by paranoia.

Elsewhere, NJ.com (out of New Jersey) published an article [5] on the topic on Sunday (September 6th). This is the part where I explain how viatical settlements became life settlements. The article states:

The life settlement business grew out of the AIDS crisis of the 1980s. In what were called viatical settlements, people living with AIDS sold their unwanted life insurance policies for sold their unwanted life insurance policies for cash they often used to cover medications or treatments.

As medical breakthroughs extended the lives of many people with AIDS, the industry shifted its focus from the terminally ill and toward seniors in their mid-60s or older, said Scott Gibson, of Lewis and Ellis, an actuarial consulting firm in Richardson.

Part of the reason why the name changed was because viatical statements had gotten a bad rap with both the public (over fraud issues, more on that later) and with investors (because those darn scientists created life-saving medications that allowed people to live longer, cutting into investor profits, dang!). But there was also something of a business model change. When people dying of AIDS could not longer produce a profit for them, investors had to go out looking for new people to buy policies from. I mean, seriously, re-read the above quote and tell me that doesn't sound predatory!

And then theres this beauty:

Seniors also need to understand that their medical records will be examined as part of the sales and that the buyers of their policies will occasionally check on them to determine when to collect the death benefits, she said.

"In this buyers' market, investors are looking for the individuals most likely to die," said Stephan Leimberg, editor of Tools and Techniques of Life Settlement Planning. "They want you old and ripe. That way, they'll pay the fewest premiums and get the best return on their investment."

The bold emphasis was added by me. I'm going to guess that there was some sarcasm intended there, but still ... this is the guy who writes a major industry publication in the world of life settlements and hes joking like this? I thought people should read that.

And, isn't that great? If you enter into of these contracts, you apparently waiver some of your rights to medical privacy and the investors get to periodically check on your health just to see how close to death you really are. Yeah, no potential for abuse there ...

Politics is also involved here. If you follow this link [6] to a blog that focuses on life settlement news, you'll see that, in one week, Connecticut, New York, California and Ohio all considered (or approved) legislation that would normalize and regulate the life settlements business in their respective states. Of course, New York, Connecticut and California alone contain a big chunk of the financial services industry of the United States. On October 8th, 2008, Credit Suisse Life Settlements LLC obstained approval to buy life insurance policies in Florida and Puerto Rico. [7] This brought their total tally to 45 jurisdictions (43 states + D.C. + Puerto Rico). This is what I found in a very quick, basic online search. I'm sure someone with more experience and understanding of the legal and political world could present a more complete picture.

Still reading? Good! I'll end this post with a reference to an article from BusinessWeek published in July of 2007.[8] First of all, BusinessWeek reminds us of the massive potential for fraud:

It all sounds great, except that many of the life settlements that Wall Street firms are buying fall into categories ranging from sketchy to toxic. "They are creating a very risky product," says Janet Tavakoli, a Chicago financial consultant who specializes in advising clients on asset-backed investments. "They may be planning to sell them to sophisticated investors, but they could be roping in people who don't appreciate the risk."

Many life settlement providers, for example, are trying to lure people who don't even hold insurance. In this tail-wagging-the-dog scenario, speculators take out policies on the individuals' behalf, pay them something up front, cover the premiums, and then wait for the people to die so they can collect. At the most outlandish extreme, one outfit devised a plan involving the population of the Federation of St. Kitts and Nevis in the Caribbean.

Investors, meanwhile, have been burned by operators who have misrepresented the profit potential on deals. Two men now awaiting trial in California hatched an allegedly fraudulent scheme aimed at the entire congregation of a black church in South Central Los Angeles. They promised investors 25% annual returns because African Americans die earlier than other racial groups—an ugly pitch that prosecutors say overstated the upside potential.

Bold emphasis added by me.

That didn't discourage the high-powered guests at the New York conference, though. As they tossed back cocktails and dined on pan-seared filet mignon, they enthused about the market's possibilities. "Wall Street firms are here because they know this is an asset class that isn't going away," says David C. Dorr, president and CEO of Life-Exchange Inc. (LFXG), an electronic platform for trading life settlements. "There's big potential.

No. No, I am not making this stuff up. The potential for absurd levels of fraud. Greedy investors targetting black people because they statistically die earlier. Rich people eating filet mignon while they toast their future successes earning profits off of the deaths of the elderly and chronically sick. What more can I really say? What more do I really have to say? I think this all speaks for itself. You *really* should read that BusinessWeek article, it'll surprise you.

Sunday, September 6, 2009

The New York Times published a pretty creepy article on Saturday (September 5th). The article focuses on Wall Street's new plan to make money. What's so bad about Wall Street making money?

Well, their new plan is to buy life insurance plans from elderly and sick people for cash. The example that the New York Times gives is someone selling a million dollar policy for a $400,000 payout, but the payout amount would all depend on the seller's life expectancy. These "life settlements" would then be bundled together to form bonds that can be sold to investors. The investors would start paying for the person's policy from then on. When the person dies, the investors collect on the policy. Apparently, the faster the person dies, the more money the investors make. However, regardless of whether you die sooner or later, Wall Street firms will profit off of fees collected from creating the bonds and facilitating transactions. You could say that Wall Street is planning to "securitize" people's lives (or deaths, as it may be) into a kind of CDO. And we all know how great that whole CDO adventure played out for Wall Street, right? What could be dangerous about creating a similar class of financial products with sick people's life expectancy as the focus?

Apparently, these type of "life settlement" investments aren't new for banks. They already exist in a lot of portfolios. Whats new is the plan to securitize these "life settlements" and market them as a big-time asset class of their own. Keep in mind, this isn't something banks are just talking about potentially doing. The Times states that Credit Suisse is "building a financial assembly line to buy large numbers of life insurance policies, package and resell them — just as Wall Street firms did with subprime securities." Estimates are putting the market for this class of investment product at $500 Billion, according to the article. I don't doubt it one bit. Considering how many people are losing their jobs or facing pay cuts and how high medical bills are these days, does anyone really doubt that there are a whole lot of elderly and sick people out there who would be eager to sell their life insurance policies for an immediate cash payout? Especially if they foresee a future inability to pay their premiums?

So whats the upside? Right now a lot of people just let their life insurance policies lapse. If they're lucky they'll still get a small payout but its usually not much compared to the premiums they've payed up to that point. Under this "life settlement" proposal, policy sellers get a bigger payout and eventually investors get their payout too. So insurance companies end up paying out on their policies more often than they do now. But, insurance companies could end up just raising rates and premiums to make up for the difference, which could end up leaving the average policyholder worse off. Wall Street profits. Insurance companies profit. The consumer pays up.

Still, its hard to really get that angry over a proposal like this. As I pointed out, these type of "life settlements" are already held in a lot of investment bank portfolios. And, who am I to say what kind of financial relationships elderly and sick people should or shouldn't engage in?

But there are so many disturbing ramifications that come out of this proposal that I can't help but be worried. The article mentions that investors lost out on these type of investments in the '80s when people with AIDS ended up living longer thanks to new medications. It also mentions that risk managers are planning on diversifying these bonds based on illness type. If one bond happens to represent too many people who all have one type of illness, then that bond could prove to be unprofitable if a cure for that illness is ever discovered. Am I the only one who finds it disturbing that it'll now be in the interest of some Wall Street investors for sick and old to people to die faster and for certain medications or medical procedures to be suppressed or kept inacessible to the public if they're too successful at actually making people live longer? I mean, don't some of these major banks also have large stakes in pharmaceutical and healthcare companies? Couldn't that present a very serious and disturbing conflict of interest? The article doesn't address these questions.

Then theres this:

Goldman Sachs has developed a tradable index of life settlements, enabling investors to bet on whether people will live longer than expected or die sooner than planned. The index is similar to tradable stock market indices that allow investors to bet on the overall direction of the market without buying stocks.

So, not only will investors be making money when some people die but some investors will also be making money by simply placing bets on life expectancy in a kind of virtual market. Great. Thank God we bailed out these banks, otherwise they wouldn't have been able to come up with these great investment products that will surely work to make America more economically competitive with the rest of the globe.

Seriously, how predatory can Wall Street get? Whats the thought process here? "I guess if the American consumer is too tapped out to buy our junk we'll just reap profit from his death and place secondary bets on the over/under for his life expectancy"? I mean, people aren't going to sell their policies for "life settlements" just because. Usually its because they have too much debt, lost their job or because they simply can't afford the medical costs of staying alive otherwise. So the American consumer is really being squeezed for every last cent he can cough up here. All of this almost sounds like a slur a communist would attack American capitalism with ("Wall Street profits off of death!") but its reality. I guess that's how deranged and parasitical some aspects of American so-called "free enterprise" have gotten.

Welcome to the Brave New World, I guess? So let me know, how do you feel about this whole plan?

Monday, August 31, 2009

If you've been following the financial media, you know that the commercial real estate sector is in trouble. Its basically following the trajectory that the residential real estate market did. Although, to be fair, the commercial real estate mortgage backed securities (MBS) market is much smaller than the residential MBS market is. Regardless, it looks like banks are poised to take another hit thanks to loan defaults. Of course, this all translates into empty storefronts so communities everywhere end up taking a hit.

Blogger Matthew Yglesias wonders why down markets don't result in unused urban storefronts being rented. He concludes that regulation might be partly responsible. Megan McArdle over at the Atlantic responds to Yglesias's post. Interestingly, she mentions a few reasons why malls might fare better than urban storefronts in this recession.

How are some empty stores being repurposed? Some are being used as street-front ad space. Others are being transformed into churches. Pretty interesting stuff.

How is retail doing in your community? Noticed any major changes or transformations?

Nearly a year after the federal rescue of the nation’s biggest banks, taxpayers have begun seeing profits from the hundreds of billions of dollars in aid that many critics thought might never be seen again.

The profits, collected from eight of the biggest banks that have fully repaid their obligations to the government, come to about $4 billion, or the equivalent of about 15 percent annually, according to calculations compiled for The New York Times.

Wow! That's great, right? Then the "buts" begin ....

The government still faces potentially huge long-term losses from its bailouts of the insurance giant American International Group, the mortgage finance companies Fannie Mae and Freddie Mac, and the automakers General Motors and Chrysler. The Treasury Department could also take a hit from its guarantees on billions of dollars of toxic mortgages.

So, this article reports that the U.S. has earned about $4 Billion in profit from the TARP program. At the same time, the trillions of dollars in other bail-outs, the stimulus program, and the rest of the TARP program have yet to produce much of any kind of positive return. In other words, the overall picture is still negative but you wouldn't be able to deduce that based on the headline and tone of this article.

The naked capitalism blog calls out the New York Times (and the Financial Times, which published a similar story) on their transparent attempts at spin.

If you believe that, I have a bridge in Brooklyn I’d like to sell you. The fact that we have such patent garbage running as a front page New York Times story says either the reporter and his editors lack the ability to think critically (or find sources who could do that for them) or that we have a controlled press. Given that subscriber-driven Bloomberg has even fallen in line, I am inclined to the latter view, but I am still curious as to how this has been achieved. Is this the price of access journalism, or is something more pernicious at work?

Naked capitalism refutes the idea that the TARP program is transforming into a profitable venture for the federal government:

A quick but not conclusive search suggests that only a small portion of the TARP has been retired, so it is wildly premature to declare victory.

In fact, another source looked at the TARP as of June and estimated that it had lost $148 billion, and had lowered loss total as a result of the repayments. Now bank stocks have rallied since then, but the biggest contributors to the red ink, namely AIG and Citigroup, are not in any better shape fundamentally than they were then. Indeed, the fact that new AIG CEO Robert Benmosche has in a remarkable show of hubris, effectively told the US taxpayer to stuff it, AIG has the dough and is in no particular hurry to return it, nor does it care what the public or Treasury wants, its demands are unreasonable. I wouldn’t hold my breath about having the loans repaid.

I don't want to leech any more of naked capitalism's post, so I encourage you to go over there and read for yourself, there is much more. Another, similar post from earlier in the day can be found by clicking here.

Sunday, August 30, 2009

There's a debate raging in the financial world right now over whether the biggest threat to the American economy's health is deflation or inflation.

Off to the top left of the screen you'll see a poll I put up asking that very question. Please vote, if you feel inclined.

Today, somebody linked me to a rather old article from January of this year. Its an interview of economist Dr. Lacy Hunt by the Business Spectator publication from Australia. You can find the article here.

Despite the fact that it was published over half a year ago, I felt strongly compelled to share this article with my readers because it presents a coherent, cogent argument that not only supports the case for deflation but, if true, puts the broader economic picture into sharper focus.

Dr. Hunt essentially argues that:

1. We are entering a period of deflation. Debt deflation to be exact. Other historical instances of debt deflation include (a) the U.S. during the 1870s-1880s, (b) the global Great Depression of the 1930s, and (c) Japan, beginning in 1988 and continuing until the present.

2. What pulled the U.S. out of its debt deflation during the Great Depression was its participation in World War II and not President Roosevelt's New Deal program. Furthermore, the Japanese have also run stimulus programs funded by large deficits over the past two decades which have led to minor, cyclical growth but which have been unable to shake off the stronger, overall deflationary trend.

3. Debt deflation lasts a long time. The deflationary period beginning after 1873 in the U.S. lasted approximately 20 years. The Japanese debt deflation that begin in 1988 is ongoing until today. As a side note, her argument is corroborated by a report from Friday which states that Japan experienced record year-over-year deflation of 2.2% in July. Click here to read a report on this development from Bloomberg. Hunt comments that in her view it is quite possible that we're entering a 15-year deflationary period right now.

4. The markets are very susceptible to what she calls "false dawns." I'll let her explain it:

Well, one of the things that has happened in these debt deflations is you get a number of false dawns. People believe that the normal business cycle is going to take control and you're going to get a cyclical recovery and the model that soon prevails is that you get three to 10 years of expansion. You have one year, maybe a year and a half of a recession or nasty economic conditions, but after a year and a half at most, the economy then has another expansion for 3 to 10 years.

When we have these very rare debt bubbles occurring at these long irregular intervals, the normal business cycle model doesn't really apply. We do get some false dawns. Some intermittent cyclical recoveries but the unwinding of the debt process proves to be very very long and difficult. One of the reasons for that is that borrowers don't know anything about paying back loans in harder times, which is what's now beginning to occur and as a consequence there is a major behavioural shift or there has been historically in which consumers decide to live inside of their means as opposed to living outside of their means and normally the saving rate goes up for a long time.

Keep in mind that this was published on January 30th of this year, when the Dow Jones Industrial Average closed at 8,000.86 points. Today (August 30th, 2009) the DJIA closed at 9544.20 points[1]. This backs up the argument I and others have made that the current rally is unsustainable. Nouriel Roubini refers to it as a "dead cat bounce" while Dr. Hunt refers to it as a "false dawn," but the premise is the same.

5. The government stimulus program is not working and actually may be making things worse. She states:

The most recent academic research that I have seen, published in 2008, indicates that the multiplier on government expenditure is just close to zero. If the government spends an additional dollar it has to fund that dollar either by raising taxes on the private sector or borrowing funds in the capital markets that would have gone to the private sector. Government spending, the government sector in the US, the productivity is at best zero and perhaps slightly negative, so when we enlarge the government sector and shrink the private sector we reduce the growth, potentiality, of the US economy. We shrink the pie and we make things worse off.

She thinks the TARP program could have gone another, alternative way:

The alternative, which the Japanese would have done and the better way to go, is to use the treasury borrowing capacity to protect the depositors and the customers of the banks and the insurance companies and perhaps extend unemployment benefits for their employees that are laid off. Zombie-like institutions intact with wholesale federal dollars, borrowed federal dollars – those institutions are really not able to grow or contribute to the economy. If instead we had protected the savers and the depositors, then institutions would have failed, but the healthy banks and insurance companies would have taken over the business of the institutions that made the mistakes and then we would have a growth trajectory going forward. So it's quite possible that the actions that we've taken and cost hundred of billions dollars, hundreds of billions of dollars have actually not helped the situation and may have had severe unintended negative consequences.

6. The U.S. trade deficit is narrowing and may be eliminated in the next few years.

She also has some advice for investors, but I'll let you visit the site and read for yourself. Overall, I thought Dr. Hunt presented one of the most compelling arguments in favor of deflation. She managed to fit her take on the current crisis into a coherent historical context and made some predictions that are strongly supported by the current financial data available.

Thursday, August 27, 2009

The other day, I wrote about economist Nouriel Roubini and the on-going stock market rally. I opined that I thought the rally was the result of investors putting aside worries about risk and making short-term investments in the stock market because its one of the few investments out there that offers the prospect of any kind of considerable returns. My overall point was that, because of this fact, the stock market should not be taken as an accurate gauge of the U.S.'s economic health. Furthermore, we're likely to see considerable volatility in the markets because of this phenomenon.

It turns out that the Los Angeles Times has published an article that pretty much directly echoes everything I said. You can read the article here.

I won't paste the whole article, but here are some important excerpts to give you an idea of what I'm talking about.

First, the opening paragraphs:

Stung by punishing losses in the bear market, some individual investors are souring on traditional buy-and-hold investing in favor of aggressive trading aimed at scoring big gains. ¶ Trading at online brokerages has soared in recent months as investors have tried to capitalize on rising securities markets. But individual investors increasingly are embracing strategies that carry outsized risks. ¶ In some cases, for example, investors have ventured into a relatively new type of investment product designed to magnify the movement of the underlying markets. That can sometimes yield big gains if investors bet correctly but bruising losses if they don't. ¶ To critics, the push into aggressive trading is the equivalent of doubling down at a casino to recoup earlier losses. ¶ "It would be a terrible tragedy if people try to recover from the devastation of the financial crisis by creating even more devastation in their personal investment accounts by taking on risks they don't understand and can't afford," said Barbara Roper, director of investor protection for the Consumer Federation of America.

The "relatively new type of investment product designed to magnify the movement of the underlying markets" that they're referring to are ETFs or Exchange-traded Funds. The article continues:

Susan York was fed up with the dismal performance of her 401(k) retirement account. Then her husband saw a Sunday morning infomercial in January touting the benefits of trading options, which give an investor the right to buy or sell stocks and other securities at pre-determined prices.

The 50-year-old from Naples, Fla., had limited investment knowledge but attended several seminars before starting to trade in May. So far, York said, she's up an average of 40% a month and is trading full time.

"It's the best job I've ever had, not just for the enjoyment but from the compensation standpoint," said York, who previously sold telecom equipment. "I've replaced a significant six-figure income."

Trading activity at online brokerages jumped in the second quarter as the stock market began rebounding in early March from its deep sell-off. Compared with a year earlier, activity was up 28% at E-Trade Financial Corp. and 36% at TD Ameritrade Holding Corp.

The article continues to state that apparently some ETFs are being sued by investors for being misleading. Overall, a pretty interesting article that makes a lot of things clearer. I think this article ultimately corroborates my assesment that the stock market is not an accurate measurement of the real American economy's health at the moment.